Adding to the tension: the central bank’s wiggle room is limited. Its key interest rate, the one it charges commercial banks for its regular loans, is at a record low of 0.25%. The rate it pays on overnight deposits is zero. A move into negative territory would be unprecedented and could bring unexpected results. Other possible measures may include steps to increase the amount of surplus cash in the financial system to keep a lid on money-market rates.

European Central Bank President Mario Draghi.

Reuters

So what does everyone think? Here’s a newly updated rundown of what investors and analysts are saying ahead of the interest-rate announcement at 0745 ET and the press conference that begins at 0830 ET.

Andrew Bosomworth, portfolio manager at PIMCO

We think the ECB will again keep all policy-levers unchanged at Thursday’s meeting while emphasizing the fragile recovery and signaling a readiness to ease further if needed. The ECB has been very transparent as to how it will react to either an unwarranted tightening of financial conditions or an unwelcome negative shock to the inflation outlook. The pertinent question is what likelihood of these negative events, or a third, a strengthening of the recovery, unfolding over the policy relevant time horizon?

Sandra Holdsworth, fixed income investment manager at Kames Capital

The difficulty that the ECB faces is that interest rates are already very low. Cutting the deposit rate below zero would be a big leap while there are also doubts over the efficacy of certain non-standard measures. If you look at recent economic data in the euro-zone, there has been more improvement so the ECB may decide to keep interest rates unchanged for now. Liquidity in money markets has been a concern and the ECB may take steps to address this issue rather than cutting interest rates.

Markets are increasingly moving towards pricing some form of policy action by the European Central Bank as concerns over possible deflation in the euro-zone have risen but I am not so convinced that the ECB will act on Thursday. We’re still in an environment of economic improvement in the euro-zone and countries have also found it easy to refinance their debts.

Guillaume Menuet, economist at Citigroup Global Markets

The fall in euro area flash January harmonized index of consumer prices increases the pressure on the ECB. But we believe that the Governing Council is unlikely to announce a cut in its refi rate just yet, preferring to wait for the March meeting to review its macroeconomic forecasts and whether its monetary policy stance needs adjusting. We still forecast that the ECB will cut the refi rate to 0% and the negative deposit rate to -0.1% in 2Q. But with a modest rebound in economic activity and reduced fragmentation, the timing is uncertain.

We expect the ECB to wait for the March staff forecast update before taking decisions. The risks of course lie to the dovish side, with many in the market now hoping for action today, in the form of a small refi rate cut (10-15 basis points) or the Securities Markets Programme sterilisation rate (currently capped at the refi rate) or a temporary interruption of SMP sterilisation. Those however aren’t bazookas. They would trigger a limited reaction, with both the euro and country spreads contracting slightly, on signs that the ECB is still willing to deliver further easing.

We forecast a 15bps cut in the main refinancing rate to 0.1% combined with a 10 basis points cut to -0.1% in the deposit rate, implying that the ECB could effectively start to charge banks for holding excess liquidity. A negative deposit rate would have a very strong signaling effect, besides its effect on the euro exchange rate, demonstrating that the ECB was ready to explore uncharted territory, but it would come at a heavy political cost in Germany and other core countries shortly before EU elections and Germany’s constitutional court ruling on the ECB’s Outright Monetary Transactions.

We think the ECB will ease the refi rate to 10 basis points. Even if the ECB does not ease – Draghi is likely to be super-aggressive on the language, in order to make it clear that the ECB is ready willing and able to react. We do not expect the depo rate to be cut. The costs versus benefits are not seen as so persuasive as yet – and perhaps one of the messages from Draghi’s interview in Davos is that the deflation fight is done via quantitative easing rather than negative rates.

The market chatter on imminent ECB action this week appears misguided. Admittedly, monetary developments have been poor with credit contraction accelerating in December and inflation matching the post-crisis low of 0.7% in January. However, more forward-looking indicators such as Eurozone PMI have been painting a much more upbeat picture. In addition, money market tensions have most recently eased significantly while the euro is at roughly similar levels as in the run-up to the ECB December inflation forecasts.

We think the most likely scenario is that the ECB chooses to bring the refi rate down to 0.1%. This could have a positive impact on inflation and, at the same time, help to push short-term money market rates down. We think the ECB will keep the deposit rate on hold on Thursday. The Governing Council may also consider using non-standard measures. The most plausible instrument would be to stop sterilising SMP bond purchases. This would add almost €180 billion ($244.8 billion) to excess liquidity and should thus reduce money-market tensions and help to lift inflation.

Interest rate strategists at RBC Capital Markets

Our call is – and remains – for a March announcement, but the ECB Governing Council under President Draghi’s tutelage has shown a remarkable alacrity for acting sooner rather than later. Consequently, there has to be a considerable risk that the rate cut we have in place for March instead comes as soon as this Thursday. We look for a dovish press conference with a Q&A that is likely to see a wider-than-usual range of questions – spanning not only the euro area’s economic outlook, but also how policymakers view money market conditions, recent volatility in emerging markets, and the details of the looming bank stress tests.

We continue to believe that the ECB will remain on hold in the short term as: 1) soft inflation prints were already expected in the first part of the year, and the downside surprise remains limited; 2) recent volatility of EONIA (euro overnight index average rate) fixings has proven to be temporary thereby reducing the need of an ECB response; 3) emerging market spillover is expected to remain modest on developed markets’ macro outlook.